Downgraded Netherlands is another victim of EMU money mess
By Ambrose Evans-Pritchard Economics Last updated: November 29th, 2013
221 Comments Comment on this article
Jeroen Dijsselbloem, the Netherlands' finance minister (Photo: AFP)
Standard & Poor's has stripped The Netherlands of its AAA rating. It is a symbolic gesture. The spread between 10-year German Bunds and Dutch bonds has barely moved.
It matters a great deal more in Dutch politics, though the ever-entertaining Jeroen Dijsselbloem said the downgrade to AA+ was "encouraging" for reform efforts. We are glad that the Dutch finance minister is encouraged.
S&P more or less said the Netherlands has tipped into a bad equilibrium. The trend growth of per capita income is "persistently lower" than peers. The economy will contract by 1.2pc this year. Real per capita growth will average minus 0.1pc from 2006-2016. Output will not regain its peak until 2017.
The erosion of real income is actually worse in the UK but the British adjustment has happened in an entirely different way, through a burst of inflation and a lower pound. The outcome is chalk and cheese.
Dutch debtors are in a trap. House prices have fallen 20pc from the peak and are expected to fall yet further. Some 16pc of mortgages are already under water. Dutch household debt is 110pc of GDP, and total private/public debt is 300pc of GDP – far higher than Italy.
It is dangerous to flirt with deflation when debt ratios are so high, yet that is exactly what is now happening in Holland. The latest data from Eurostat shows that HICP inflation has been running at around minus 0.8 annualised, once adjusted for taxes, as you can see here.
The Netherlands has great reserves of wealth, much of it is locked up in pension funds. It should be able to muddle through provided the deflation scare abates – as confidently expected by all those officials who never saw it coming in the first place – and provided the eurozone economy does in fact rebound next year.
What is clear is that the country no longer has a safety buffer. Any external shock will push Holland into Japanese-style deflation, greatly complicating Dutch debt dynamics. This is not a risk that any advanced economy should ever take.
The whole saga has been a case of misaligned of monetary policy for the Netherlands, degenerating over time into plain policy error. The ECB's interest rates were too low for Dutch needs during the credit bubble. Monetary policy has since been too tight, trapping the country in a slow bust. Dutch M3 money growth dropped to minus 3.6pc in October, as you can see in this chart from Ed Yardeni.
The reality is that even The Netherlands has been destabilised by monetary union despite being a creditor state and despite close trade ties to Germany. The country is now stuck. S&P expects the Dutch current account surplus to rise to 10pc of GDP from 2013-2016. And no, this is not a sign of health. Extreme imbalances are always bad. A deformed structure has become entrenched.
What surprises me is that the Dutch central bank has gone along with the ECB's over-tight policy so lamely. Why did Governor Klaas Knot vote with the hawks against the ECB's rate cut earlier this month? Is it some sort of Calvinist solidarity, "zachte heelmeesters maken stinkende wonden" as the old Dutch saying goes?
Why is he lining up with the hardliners when the ECB is missing its own M3 and inflation targets by a country mile, and when this policy mistake is doing so much damage to both Europe and his country?
No doubt Mr Knot has many excellent technical explanations. I would like to hear them. Perhaps the Tweede Kamer would like to hear them too.
More by Ambrose Evans-Pritchard:
China-Japan rearmament is Keynesian stimulus
Post-monetarist Fed is sleepwalking into a trap
ECB ready to print, Germany ready to scream
Read the comments on this Article, quite interesting , if the EURO collapses, so will the EU.
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